Jahn v. Char (In re Incentium, LLC)

• Decision Date: 10 May 2012
• Docket Number: Adversary No. 11–1147.,Bankruptcy No. 11–10706.
• Citation: 473 B.R. 264
• Parties: In re INCENTIUM, LLC, Debtor. Richard P. Jahn, Jr., Trustee, Plaintiff v. Richard Char, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

473 B.R. 264

In re INCENTIUM, LLC, Debtor.

Richard P. Jahn, Jr., Trustee, Plaintiff

v.Richard Char, Defendant.

Bankruptcy No. 11–10706.

Adversary No. 11–1147.

United States Bankruptcy Court,

E.D. Tennessee.

May 10, 2012.

Richard P. Jahn, Jr., Chattanooga, TN, for Plaintiff.

Bruce C. Bailey, Chambliss, Bahner and Stophel, Chattanooga, TN, for Defendant.

MEMORANDUM

JOHN C. COOK, Bankruptcy Judge.

This adversary proceeding is before the court on the parties' cross-motions for summary judgment, regarding the plaintiff's assertion that certain severance payments made by the debtor to the defendant are avoidable as fraudulent transfers. The defendant's motion also seeks summary judgment on the plaintiff's assertion that the payments are avoidable as preferential transfers. Having reviewed the motions, briefs, statements of undisputed material facts, stipulation of the parties, and plaintiff's affidavit, the court will grant the defendant's motion and deny the plaintiff's motion.

I.

The record reveals the following undisputed material facts. The defendant was hired by the debtor as its Chief Executive Officer and President pursuant to an Employment, Confidentiality, Invention Assignment and Trade Secret Protection Agreement (the “Employment Agreement”) that was signed on October 24, 2008, by the defendant and the Chairman of the debtor's Board of Members. Section 3(a) of the Employment Agreement provided for a base salary of $250,000 per year, and Section 4(b) of the Employment Agreement provided that, if the defendant was terminated without cause, he would be entitled to continue receiving his Base Salary for six months if he signed and complied with a release of the employer and did not apply for unemployment compensation:

If the Employment Period is terminated by the Company without Cause, Executive shall be entitled to continue to receive his Base Salary payable in regular installments as special severance payments (the “ Severance Payments ”) for a period of six (6) months following the date of termination (the “ Severance Period ”), if and only if Executive (i) has promptly, subject to applicable law, executed and delivered to the Company a general release of all claims against Parent, the Company, Parent's other Subsidiaries and their respective directors, officers and affiliates containing such terms as are customary and commercially reasonable for such a general release provided in the context of an employee separating from an employer (provided that in any event such general release shall provide for a complete and unconditional release of all claims by Executive, including without limitation claims that are unknown or unsuspected) and such general release has become effective, and only so long as Executive has not revoked or breached the provisions of the general release or materially breached any of the provisions of Sections 5 through 11 herein and (ii) does not apply for unemployment compensation chargeable to the Company during the Severance Period.

The defendant also became a member of the limited liability company's Board of Members in October 2008, after his employment had commenced.

On March 9, 2010, the debtor's Board of Members notified the defendant that it was terminating him without cause, and the debtor and the defendant signed a Separation Agreement dated as of that date. Section 2(b) and (c) of that agreement provide in relevant part:

(b) Severance. In accordance with Section 4(b) of the Employment Agreement, but subject to the terms and conditions set forth in Section 2(c), beginning on the Separation Date and continuing as set forth below Executive shall be entitled to receive the following severance payments and other benefits (collectively, the “ Severance Benefits ”):

(i) An aggregate amount equal to $125,000 as special severance payments, which shall be payable in regular, ratable installments over a period of 6 months (the “ Severance Period ”) commencing on the Separation Date in accordance with the normal payroll practices of Incentium as in effect on the Separation Date, but in no event less frequently than monthly.

....

(c) Conditions Regarding Severance Benefits. Executive shall be entitled to receive the Severance Benefits set forth herein during the Severance Period (A) if and only if (x) Executive has executed and delivered to the Company a general release in the form of Exhibit A attached hereto (the “ Release ”), which Release shall be incorporated as if fully set forth herein, and (y) the Release has become effective and is no longer subject to revocation no later than on the 60th day immediately following the Separation Date, and (B) only so long as Executive has not (w) revoked or breached (including, without limitation, by bringing any Claim, as defined therein) the Release, (x) breached any provision of this Agreement, (y) materially breached any of the provisions of Sections 5 through 11 of the Employment Agreement or (z) applied for unemployment compensation chargeable to the Company during the Severance Period. Executive shall automatically forfeit all of his rights to Severance Payments in the event Executive fails to satisfy any of the conditions set forth in clause (A) or (B) of the immediately preceding sentence.

Section 11(b) of the Separation Agreement reads:

Complete Agreement. This Agreement and those agreements expressly referred to herein embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way (including, without limitation, all provisions of the Employment Agreement that become automatically terminated upon termination of the Employment Period). For the avoidance of doubt, this Agreement does not supersede, preempt, modify or terminate any of the Restrictive Covenants, except as specified in Section 4 above, nor does this Agreement supersede, preempt, modify or terminate the Motivus Holdings, LLC Indemnification Agreement entered into between Executive and Holdings on December 18, 2008.

The defendant has admitted, for the purposes of the present motions, that the debtor's books and records reflect that it was insolvent from February 2010 forward.

The defendant did not render any benefit or service to the Debtor after the date of the Separation Agreement. The parties agree that the minimum amount of severance pay received between March 9, 2010, and September 17, 2010, was $104,810.36.¹ The defendant also received vacation pay of $10,096.80, and the plaintiff also contends that the defendant received back pay totaling approximately $12,000.00.

On February 10, 2011, an involuntary petition for relief under chapter 7 of the Bankruptcy Code was filed against the debtor, and an order for relief was entered on March 8, 2011. On September 29, 2011, the plaintiff filed the complaint initiating this adversary proceeding, which seeks to avoid the Separation Agreement as a fraudulent obligation, and to avoid the severance payments as fraudulent transfers and as preferential transfers. On April 2, 2012, the parties filed cross-motions for summary judgment, which address the avoidability of the Separation Agreement and of the severance payments to the extent of $104,810.36.

II.

A party is entitled to summary judgment if “the movant shows that there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Bankr.P. 7056; Fed.R.Civ.P. 56(a). When deciding a motion for summary judgment, the court will construe all reasonable inferences in favor of the non-moving party. Waeschle v. Dragovic, 576 F.3d 539, 543 (6th Cir.2009) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)). Where the evidence would permit a reasonable jury to return a verdict for the non-moving party, a genuine issue of material fact exists and summary judgment must be denied. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

In the face of a summary judgment motion, the nonmoving party may not rest on its pleadings, but must come forward with some probative evidence to support its claim. Celotex v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); 60 Ivy St. Corp. v. Alexander, 822 F.2d 1432, 1435 (6th Cir.1987) (holding that nonmoving party must present “some significant probative evidence which makes it necessary to resolve the parties' differing versions of the dispute at trial”). In the words of Rule 56(c)(1) of the Federal Rules of Civil Procedure, “[a] party asserting that a fact ... is genuinely disputed must support the assertion by ... citing to particular parts of materials in the record ... or ... showing that the materials cited do not establish the absence ... of a genuine dispute, or that an adverse party cannotproduce admissible evidence to support the fact.”

III.

A.

The plaintiff seeks recovery in this proceeding pursuant to § 548(a)(1)(B) of the Bankruptcy Code, which provides, in pertinent part:

The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—

....

(B)(i) received less than reasonably equivalent value in exchange for such transfer or obligation; and

(ii) (I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;

...

(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of...